Withdrawal Strategies-Bucket study

[winpplui]

I am approaching my retirement data, and I like to investigate in advance everything
First about me: Living in Canada, I will have “good “ lifetime pension m and some Canadian pension also(reduced as I would live only 17 years in Canada)
Besides that guaranteed income I will have some rental income and some investments, mostly Nasdaq indexes.

Guaranteed yearly income would be around 70K (including my wifes part), rental income would be around $60K, and I will keep around $1.2M in investments. MY target is to have around $120K after taxes (35% maybe)

I was thinking about the bucket withdrawal strategy. I run some home-made simnulations, but it maked no sense to me (I am talking pure financially, maybe I would sleep better with the buckets in a downturn)

Does anyone know a good paper/resource/calculator to study the bucket strategy?

 

[TheWizard]

I would not recommend a bucket strategy.
Just focus on an Asset Allocation glide path of some sort and do pro rata withdrawals.
Simpler and you'll be fine...

 

[Markola]

Do you even need to touch your portfolio? If not, don’t worry about distracting buckets, stay fully invested and let it ride. If so, maybe take enough interest and dividends to meet your annual spend goal.

Personally, I think of my bond funds as my cash bucket.

 

[Out-to-Lunch]

Another bucket doubter. You know, whatever is in your portfolio is what you have in your portfolio, buckets or no buckets.

I think that the following is a fair description of bucketing: A system of very vaguely described rules for changing your AA in response to market conditions. (Which, personally, I don't think is a good idea.)

 

[RobLJ]

There are a variety of bucket strategies, but they mainly seem an easily graspable metaphor for a stock-bond-cash allocation with rules for reblancing on a yearly or (more frequent) interval.

Replenishing the long-term stock bucket from bonds or cash may be the most important rebalancing rule. I don't see any harm; in fact, I suspect it may encourage people to keep a stock allocation in the face of a multi-year downturn. (I've got too much cash in my bucket.)

 

[Out-to-Lunch]

Replenishing the long-term stock bucket from bonds or cash may be the most important rebalancing rule.

I don't disagree with this. However, I don't ever recall seeing a bucket strategy that calls for buying stocks from the "cash bucket." I could be that I am not sufficiently well-read. Can you point me to one?

 

[RobLJ]

I recall the Morningstar Bucket columnist (Christine Benz I think?) mentioning, although I think one big variable would be how many years are in the cash bucket. I.e., the more years cash in the cash bucket the more likely to rebalance from the cash bucket.

In March, I did a version of this by buying stock funds from cash after reducing the stock allocation from 55% to 43% slowly through 2018-early Feb 2020. My ostensible stock allocation was 45% but I thought the late 2019/early 2020 VERY overdone and I was getting quite disturbed that the COVID was very likely to be our 2018 Spanish flu. I bought back up from abit higher than 38% at the March depths back to 43% in March, then watched the rocket take off, somewhat stunned. The more in the cash bucket the more optionality you have when the market flushes repeatedly. That said, the March flush was breathtakingly short compared to most.

Normally you would eventually have to sell bonds as the stock market flush continues for a year or two or three, a la 2001/2007 events (edit: or 4 or 5 years).

I don't disagree with this. However, I don't ever recall seeing a bucket strategy that calls for buying stocks from the "cash bucket." I could be that I am not sufficiently well-read. Can you point me to one?

 

[RobLJ]

Addendum: I have high cash/low stock now, 4 years before FSA (full Social Security Age) due to SOR risk, but plan to steadily increase the stock allocation back up to 60% at that point, or earlier if SS is in sight and not much risk. The last 4 years were the highest risk, actually.

 

[Out-to-Lunch]

It appears that you have a quite different notion of what a bucket strategy entails than I do.

I recall the Morningstar Bucket columnist (Christine Benz I think?) mentioning, although I think one big variable would be how many years are in the cash bucket. I.e., the more years cash in the cash bucket the more likely to rebalance from the cash bucket.

I don't see anything here to suggest that one would ever raid the cash bucket to buy stocks.
https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation

Rebalancing is the hallmark of a normal, NON-bucket strategy. The entire point of a bucket strategy is to avoid the kind of rebalancing you are discussing: (https://www.marketwatch.com/story/do-bucket-strategies-stand-the-test-of-time-2019-02-12 )

The bucket portfolios, in contrast, at most engage in only half of these rebalancing transactions, since they do sell some of their outperforming assets to fund withdrawals. But they do not engage in the other half of rebalancing—purchasing more of underperforming assets. And that puts a significant damper on these portfolios’ longer-term returns.

 

[Huston55]

I am approaching my retirement data, and I like to investigate in advance everything
First about me: Living in Canada, I will have “good “ lifetime pension m and some Canadian pension also(reduced as I would live only 17 years in Canada)
Besides that guaranteed income I will have some rental income and some investments, mostly Nasdaq indexes.

Guaranteed yearly income would be around 70K (including my wifes part), rental income would be around $60K, and I will keep around $1.2M in investments. MY target is to have around $120K after taxes (35% maybe)

I was thinking about the bucket withdrawal strategy. I run some home-made simnulations, but it maked no sense to me (I am talking pure financially, maybe I would sleep better with the buckets in a downturn)

Does anyone know a good paper/resource/calculator to study the bucket strategy?

OP-

You've said you have $130k ($70k + $60k) guaranteed (and it sounds like it's inflation adjusted) income per year. If your target is $162k/yr ($120k*1.35), then you only need $32k/yr from your $1.2M portfolio, which is a WDR of only 2.67%. I'm not sure what's keeping you from sleep.

If you want the remaining $32k/yr "guaranteed", consider a SPIA, or a fixed income ladder (TIPS or CDs) for a period that suits your risk profile. If you can live without that final $32k/yr being "guaranteed", then find an AA that suits your risk profile for your $1.2M and rebalance annually. If you want something in between risk wise, use your selected AA with a "% of Portfolio" or "Fixed % Risk" approach and rebalance annually. See the links below for some guidance on these last two.

The Retirement Café: Dominated Strategies

The Retirement Café: Search results for dynamic spending

 

[teejayevans]

It appears that you have a quite different notion of what a bucket strategy entails than I do.



I don't see anything here to suggest that one would ever raid the cash bucket to buy stocks.
https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation

Rebalancing is the hallmark of a normal, NON-bucket strategy. The entire point of a bucket strategy is to avoid the kind of rebalancing you are discussing:

I thought the point of bucket strategy was to have different assets for different time frames. In other words...
Need money to live on for next 2-5 years, use investments that can’t go down.
Need money for 3-7 years timeframe, use balance fund.
Anything longer was stocks.
Fill the shorter term buckets when stocks are up.
I think some of you are making it too complicated.

 

[audreyh1]

I thought the point of bucket strategy was to have different assets for different time frames. In other words...
Need money to live on for next 2-5 years, use investments that can’t go down.
Need money for 3-7 years timeframe, use balance fund.
Anything longer was stocks.
Fill the shorter term buckets when stocks are up.
I think some of you are making it too complicated.

Yeah, that’s basically it.

The devil is in the details when it comes to replenishing the shorter term buckets is all.

 

[big-papa]

Correct. And there are a number of such strategies, when you analyze them, end up being identical to just having a fixed AA. But if it helps some people remain disciplined then why not?

Yeah, that’s basically it.

The devil is in the details when it comes to replenishing the shorter term buckets is all.

 

[audreyh1]

Correct. And there are a number of such strategies, when you analyze them, end up being identical to just having a fixed AA. But if it helps some people remain disciplined then why not?

Yes, I agree that it can be a useful tool, especially if it helps someone stay long-term invested with the bulk of their portfolio because they know they have several years of needs covered.

I always have some of my fixed income matched to shorter duration time needs.

 

[Markola]

Correct. And there are a number of such strategies, when you analyze them, end up being identical to just having a fixed AA. But if it helps some people remain disciplined then why not?

My reason is, I don’t like the cash drag but YMMV.

 

[teejayevans]

The devil is in the details when it comes to replenishing the shorter term buckets is all.

I think now is a good time to do some replenishing.

 

[Puravida1]

I do like the conceptual appeal of the bucket strategy but its not really in conflict with a specific asset allocation. Heres what I do.

1) start with an annual budget - say 50k
2) Then I have a series of portfolios with different risk based asset allocations based on when I need the money
i) 2 years expenses in Cash - bucket 1
ii) Next bucket has 3 years inflation adjusted expenses - bucket 2 - this has money needed 3 to 5 years from now so use a Conservative Asset Allocation
iii) Next bucket has 5 years inflation adjusted expenses - bucket 3 - this has money needed 5 to 10 years from now so use a Moderately Conservative Asset Allocation
iv) Next bucket has 5 years inflation adjusted expenses - bucket 4 - this has money needed 10 to 15 years from now so use a Moderate Asset Allocation
v) Next bucket has 5 years inflation adjusted expenses - bucket 5 - this has money needed 15 to 20 years from now so use a Moderately Aggressive Asset Allocation
vi) Everything left is in the last bucket - bucket 6 - this has money needed 20 years+ from now so use an Aggressive Asset Allocation
3) Map all your money into these buckets
4) Now take a step back and add up the total amount of money you have in your Asset classes across all the buckets. This is going to result in an overall Asset Allocation. Use this to invest.

This strategy has the advantage of the simplicity of an overall Asset Allocation at the same time as the conceptual appeal of the buckets.

I like how it is bottom up based on expenses rather than top down based on how much money you have. I also like the fact that it forces you to be more conservative when you don't have enough money and more aggressive when you have more than enough. Human nature pressures you to do the opposite.

 

[audreyh1]

I think now is a good time to do some replenishing.

Yes, during a long multi-year bull market you can replenish every year.

Replenishing seems to be more of a judgement call thing, and not formulaic.

I guess if the market drops and stays down for a while, you draw on your first bucket, then on your second if you exhaust your first. And by then the stocks should have recovered and you start replenishing one and two. But by how much, etc., gets more complicated.

Rebalancing an AA is simpler. I do have a limit to how low I allow my fixed income to go when selling bonds to buy stocks after a downturn. I don’t believe the bucket strategy has you buying stocks from fixed income after a big market drop.

 

[Puravida1]

The way I do it you are always drawing from the first bucket. I rebalance all the buckets twice a year regardless of what the market is doing. If stocks are down, then you will be overweight in bonds or cash and so are forced to buy stocks in order to get back in balance. Its fine to say sell when the market is up, replenish and dont when its down but its so hard to know at the time what is up and what is down. I was certain this summer that the market was high and headed for a fall, but it didnt turn out that way at all. If your withdrawal ratio is low enough you always have years of cash anyway so its not like you are ever going to really run out of cash and be forced to sell stocks when they are low.

 

[Out-to-Lunch]

Yeah, that’s basically it.

The devil is in the details when it comes to replenishing the shorter term buckets is all.

Correct. And there are a number of such strategies, when you analyze them, end up being identical to just having a fixed AA. But if it helps some people remain disciplined then why not?

I agree with these points. I think it is mental accounting, BUT, that is not automatically a pejorative statement. "Mental accounting" can also describe a heuristic that is (potentially) useful in guiding behavior. But, as Audrey says, the devil is in the details.

The way I do it you are always drawing from the first bucket. I rebalance all the buckets twice a year regardless of what the market is doing. If stocks are down, then you will be overweight in bonds or cash and so are forced to buy stocks in order to get back in balance. Its fine to say sell when the market is up, replenish and dont when its down but its so hard to know at the time what is up and what is down. I was certain this summer that the market was high and headed for a fall, but it didnt turn out that way at all. If your withdrawal ratio is low enough you always have years of cash anyway so its not like you are ever going to really run out of cash and be forced to sell stocks when they are low.

To me, what you (Puravida) have described is a interesting and perhaps insightful way to set your AA. But if you rebalance twice a year, that is not consistent with what most would describe as a bucket strategy.

 

[OldShooter]

AFIK, the bucket approach is not a religion. No pope. No doctrine. No risk of being burned at the stake or tortured for apostasy.

To me, an AA focus and a bucket focus are just mental accounting; thinking about fungible money in ways that are useful. https://en.wikipedia.org/wiki/Mental_accounting

So we look at our portfolio both ways. AA is useful especially when thinking about volatility. Buckets are useful when thinking about liability matching. An AA that holds only long bonds may become somewhat problematic from a liability matching point of view when real estate taxes are due on Tuesday, so both views are useful for planning.

People gripe that many bucketeers don't have hard and fast rules for moving funds among buckets, but typical AA rebalancing rules produce very small changes and, from history, AAs within a fairly wide range produce the same results anyway. So, nice clean rules but basically busywork. I am quite comfortable with a flexible refill policy; sell assets when things are looking good, up to the point where the next x years of liabilities are matched with suitable asset liquidity. Done. No sleep lost.

"Cash" is another problem in many threads here. Endless threads talk about holding "cash" without specifying what that word means. I have two twenties and a five in my wallet; that is cash. Everything else is "assets" with liquidity and risk characteristics selected to suit future liability matching.

Finally, I'll predict that all AA-ers will find their inner bucketeer when they get to a point where rebalancing would require that their fixed income tranche fall below their comfort point.

So, @winpplui, there is no "the bucket strategy." It is a way of thinking about liability matching that, depending on the practitioner, comes with a varying burden of rules. DW and I usually think in terms of two buckets, near and far, or possibly three: near, far, and estate. Refills? These are basically attempts at market timing, so we'll go with our best guess.

 

[RobLJ]

Saw your post just before I went to bed; you're right that most "bucketists" think of buckets as completely trickle-down (not trickle-up into the stock bucket).

But I was thinking (I think) of an article posted quite a while ago by Evensky (I think) in which he essentially advocates two buckets--a five year or so cash bucket then the rest stock/bonds. Presumably one would rebalance between the various stock and bond components. However, you are still right in that here there is no hint of drawing from cash to rebalance--just between the stock and bond components. (Edit: His approach is fairly similar to what OldShooter posted--I hadn't read it before posting this and is "behavioralist" in trying to keep his clients from panicking in downturns.)

I think Benz interviews him a lot. It is an interesting interview:
https://www.morningstar.com/article...-common-sense-approach-to-retirement-planning
He appears a little more flexible on "bucketing" than most bucket systems, but your description is more accurate of most/all of them.

It appears that you have a quite different notion of what a bucket strategy entails than I do.

I don't see anything here to suggest that one would ever raid the cash bucket to buy stocks.
https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation

Rebalancing is the hallmark of a normal, NON-bucket strategy. The entire point of a bucket strategy is to avoid the kind of rebalancing you are discussing: (https://www.marketwatch.com/story/do-bucket-strategies-stand-the-test-of-time-2019-02-12 )

 

[rt-texas]

I'm also one of those people who uses the buckets as more of a mental strategy. Normal 65/30/5 AA but in my Excel sheets I have three buckets that help keep me disciplined. Next three years, 4-9 years and 10 till death do us part.

I just assign on paper where each fund or etf "belongs" so to speak. Helps me not lose sleep when things like March 2020 happens.

Have the next 9 years covered no issue, most downturns last max five years, so long term bucket no need to touch for a while.

 

[Puravida1]

Exactly right. But for me this is the key to FIRE. As its an Early retirement, you implicitly have the option to keep working. It takes confidence in your plans to be able to pull the plug on your working income and retire early. You have to really believe you are doing the right thing and wont run out of money. So its even more important to know how your plan was put together than the actual answer itself. Hence the mental accounting. Better than hiring an advisor who is paid a fee to tell you an answer that they know you want to hear. I know my approach does not exactly follow the standard strategies, but it is close enough to the text book advice and it lets me sleep easy.

 

[Out-to-Lunch]

Exactly right. But for me this is the key to FIRE. As its an Early retirement, you implicitly have the option to keep working. It takes confidence in your plans to be able to pull the plug on your working income and retire early. You have to really believe you are doing the right thing and wont run out of money. So its even more important to know how your plan was put together than the actual answer itself. Hence the mental accounting. Better than hiring an advisor who is paid a fee to tell you an answer that they know you want to hear. I know my approach does not exactly follow the standard strategies, but it is close enough to the text book advice and it lets me sleep easy.

Sounds good to me!